International Monetary Fund Washington, D.C.

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1 2008 International Monetary Fund October 2008 IMF Country Report No. 08/342 [Month, Day], 2001 [Month, Day], 2001 Lao People s Democratic Republic: Poverty Reduction Strategy Paper Annual Progress Report Poverty Reduction Strategy Papers (PRSPs) are prepared by member countries in broad consultation with stakeholders and development partners, including the staffs of the World Bank and the IMF. Updated every three years with annual progress reports, they describe the country s macroeconomic, structural, and social policies in support of growth and poverty reduction, as well as associated external financing needs and major sources of financing. This country document for Lao People s Democratic Republic, dated November 5, 2007, is being made available on the IMF website by agreement with the member country as a service to users of the IMF website. Copies of this report are available to the public from International Monetary Fund Publication Services th Street, N.W. Washington, D.C Telephone: (202) Telefax: (202) publications@imf.org Internet: Price: $18.00 a copy International Monetary Fund Washington, D.C.

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3 LAO PEOPLE S DEMOCRATIC REPUBLIC Committee for Planning and Investment Department of International Cooperation Round Table Implementation Meeting 8 November 2007 Vientiane Achievements, Constraints and Future Direction within the Implementation of the National Socio-Economic Development Plan Main Background Document CPI/DIC, 5 November 2007

4 Table of Contents Executive Summary 3 Introduction 6 1. Major Achievements, constraints and future plans within 7 the implementation of economic and social policies 1.1. Government s overall policy performance Macroeconomic Performance Future direction with regard to the macroeconomic policy Cross-cutting issues: current situation and future actions 14 -Poverty reduction -Governance -National Millennium Development Goals 1.5. Sectoral policies implementation 19 -Education -Health -Agriculture and Forestry -Transport 2. Major achievements, constraints and future plans with 25 regard to ODA mobilization, coordination and management 2.1. Current situation 25 -Coordination mechanisms -Aid effectiveness within the Vientiane Declaration 2.2. Needed improvements and actions for the future 28 -Implementing the Vientiane Declaration -Improving the Sector Working Groups -Matching Budget resources with ODA Conclusion 31 2

5 Executive Summary Achievements: Tremendous progress has been achieved over the past few months in consolidating the macroeconomic stability through appropriate fiscal and monetary policies. Noticeable improvements have also occurred in many economic, social, institutional and legal development areas. While strengthening the management of the public sector and governance, the GoL is increasing public investment to develop physical and social infrastructure and promote human resources. The promotion of the private sector is receiving greater attention through significant improvements in the business climate and trade facilitation. Macroeconomic indicators are evolving in a satisfactorily manner. For the Fiscal Year , inflation was reduced, the Kip was quite stable, domestic budget revenues increased to 13.8 % of GDP, public expenditure of which a significant proportion (45%) was directed to public investments - did not exceed 21.7% of GDP, and budget deficit was contained at a level of 5% of GDP. Economic growth, driven by industry and services was about 7.6% in real terms. Exports are increasing year after year as Lao PDR takes advantage of new trade opportunities in the region and outside. Investments both public and private are increasing with a stronger share taken by FDI. A number of national MDG targets, according to preliminary findings of the 2008 MDG report now under preparation, are progressing well placing Lao PDR in good position to achieve MDG targets by year In general terms there have been significant achievements in the social and economic sectors. Primary education enrolment rate represents 87%, lower secondary enrolment 65% and upper secondary enrolment 42.5%. Increased resources from National Budget and ODA are being channeled to respond more effectively to education needs throughout the country. Several health indicators are steadily improving and the health sector is attracting greater attention and increased domestic and external resources and investments (both public and private) to improve the services rendered to the population. Agriculture is being developed with tangible achievements in food and commercial crops production, increasing exports to neighboring countries and contributing to improving the living conditions of rural people. The transport network is under continuing expansion and is providing increased facilities to support productive investments and boost up broad based economic growth. 3

6 ODA coordination is attaining good progress within the round table process. Valuable external resources have been mobilized to complement domestic funding and accelerate the country s development. GoL and DPs have adopted the Vientiane Declaration on Aid Effectiveness that is currently under implementation. Overall coordination mechanisms (RTM and RTIM) and sectoral and intersectoral coordination (SWG) are being significantly strengthened with stronger leadership and ownership by the government over the development process. SWGs are kept at the current number of eight to avoid proliferation and improve their effectiveness. Policy dialogue involving GoL and DPs was significantly strengthened demonstrating common willingness to build consensus on development issues, ensure better accountability and appropriate management to achieve targeted results. Shortages and constraints: Constraints and insufficiencies are being faced at different levels and in varying degrees of the development process. They relate to all aspects of development and can be summarized as follows: Structural weaknesses in the economy and little progress in expanding the growth base and diversifying economic activities. Inequalities and disparities of economic growth and social development between geographic areas and among different groups of the population. Insufficient natural resource management and associated revenue generation. Fragile public finance system in spite of estimable achievements, and yet improvements are needed in revenue collection, public expenditure management and the capacity at national and provincial levels to enforce provisions of relevant laws and implement rules and regulations. Unemployment and underemployment are still high. Severe UXO contamination is denying land for agricultural expansion, disrupting forest management, killing livestock and wildlife. Economic opportunities in tourism, hydroelectric power, mining, forestry, etc are restricted, complicated, and made more expensive. Social development is still insufficient to address severe problems encountered by a large part of the population. Poverty is still high across the Lao Society and particularly among rural population. Child malnutrition and maternal health are of concern. Access to public services especially education and health facilities is not affordable to a large number of disadvantaged and vulnerable groups especially the poor in rural areas. 4

7 Gender disparities still exist in education and other domains. Lack of basic infrastructure in remote areas limiting access to markets and to public services. Severe weaknesses in individual and institutional capacity within the public administration. Insufficient legal and judicial framework and governance in general in spite of steady progress. Actions for the future: A number of actions and measures are required to meet existing challenges: accelerate economic and social development, reduce inequalities, pursue and strengthen targeted actions to combat poverty, deploy greater efforts to achieve the national MDGs, and develop the national capacity and, individual, organization and institution s abilities to cope with the various requirements. These actions and measures are presented in detail in relevant parts of this document and are related to most of the issues described above. The GoL is strongly committed to pursue efforts leading to the achievement of the development goals and outcomes. Nevertheless, a continuing support from the Development Partners is essential to carry out planned actions and overcome weaknesses and deficiencies. 5

8 Introduction Within the preparatory process leading up to the RTIM, the GoL has undertaken over the past few weeks a series of sectoral and thematic consultations to clarify issues related to the implementation of strategies, policies and programmes. Most of these consultations were organized within the Sector Working Groups (SWGs) and covered the following: Agriculture and Forestry Health Education Transport Development Implications of Natural Resource-based Growth Public Expenditure Management Private Sector Development Progress towards achieving the Millennium Development Goals in Lao PDR And, Sector Working Groups and coordination at the sectoral level. In addition, the GoL prepared an assessment on the status of implementation of the 6 th Development Plan (the National Socio-Economic Development Plan) and an evaluation of the implementation of the Vientiane Declaration on Aid Effectiveness (VD). Development Partners -co-chairs of the SWGs and others-, have participated actively in these collegial consultations led by the respective government ministries and institutions. Various implementation issues pertaining to policies, programmes, projects, coordination, financing, capacity building, actions and measures for the future were discussed and analyzed. The overall consultation process was coordinated and facilitated by the CPI/DIC which provided advice and guidance to ministries and ensured necessary harmony between the Government s overall priorities and Development Partners concerns and expectations. The aim of these consultations and assessments was to strengthen the dialogue and coordination between the Government and its partners in development and prepare the ground for the plenary discussions at the RTIM. This represents an innovative approach in comparison with previous RTMs and RTIMs and consolidates the link between the SWGs, the RTIM and the main RTM, each of which are essential components of the overall coordination mechanism. As key sectors and themes were discussed in detail, reports on their findings and recommendations will be submitted (reported back) to the RTIM, and the latter will focus more on policy issues and the facilitation of decision making, as it might be needed for deliberations on pending issues. 6

9 Furthermore, this approach appears to both the Government and DPs to be a good opportunity to consolidate the Round Table Process and to bring greater attention to the concretization of the five principles of the VD: Ownership, Alignment, Harmonization, Managing for Results, and Mutual Accountability. The current background document provides an overall picture of the main achievements since the last RTM held in November 2006 and which coincided with the beginning of the Fiscal Year It provides a synthesis of the key issues regarding the implementation of the overall development strategy and sectoral and thematic policies and programmes. It highlights also the actions needed for the future, taking into consideration the work done within the pre-consultation sessions. In doing so, this document is not intended to cover all aspects of development policies and programmes. The current document is the result of contributions from different Government agencies who prepared sectoral and thematic papers. In most cases, these papers were developed jointly with Development Partners. Several DPs also provided, at the request of CPI/DIC, a paper reflecting their respective contributions to the implementation of the Vientiane Declaration. The Government agencies papers are made available for the RTIM and those who need to may refer to these papers for detailed analysis of the respective sectors and topics The background document is structured around the following axes: Major achievements, constraints and future plans within the implementation of the economic and social policies Major achievements, constraints and future plans with regard to ODA mobilization, coordination and management. 1. Major achievements, constraints and future plans within the implementation of economic and social policies 1.1. Government s overall policy performance The GoL is carrying on the implementation of the National Socio-Economic Development Plan , the National Millennium Development Goals and Sectoral Strategies with the aim to achieving the targeted objectives and outcomes. Impressive strides were achieved in improving the macroeconomic framework and noticeable improvements were realized in many economic, social, legal and institutional development areas. Efforts are ongoing within the implementation of the public administration reform in order to strengthen the public sector management, enhance the government s organizational structure and capacity, and improve the civil service management and human resource development as well as public service delivery. 7

10 Efforts are equally being made to continue the implementation of reforms in the legal and judicial framework, and in the public financial management, in order to improve governance and transparency, ensure the fulfillment of commitments to ASEAN and AFTA, facilitate accession to WTO and combat corruption. At the same time, the Government is promoting domestic and foreign private investment, designing and implementing policies to protect the environment, strengthening the banking and financial sector and proceeding with the integration of the economy within the global and regional context. While the Government is multiplying its efforts to place the market economy on the right track and provide a solid foundation for private sector-based growth, the role of the Government is equally being enhanced in setting rules and regulations, ensuring a better balanced economic growth, building necessary physical and social infrastructure, maintaining macroeconomic stability, as well as political and social harmony. In more general terms, Lao PDR is becoming more accessible to the world, not only for tourism and trade, but also for the organization of regional and international political events such as the several ASEAN meetings held during the past few years and the coming Ministerial Conference of the Francophonie. Lao PDR will also host, in 2009, the 15 th ASEAN Conference on Civil Service. Nevertheless, several constraints and shortages were encountered at different levels and in varying degrees, affecting to some extent, the pace at which the Government wants to attach for the improvement of the livelihood and human well being of the multi-ethnic Lao people. To date, Lao PDR remains a low income developing country, and the Human Development Index ranks the country at 133 rd position out of 177 countries. Achievements, constraints, and actions for the future are developed in more specific terms in the following sections. 1.2 Macroeconomic performance Main ratios and indicators The macroeconomic situation remained stable during the Fiscal Year , in line with the prudent fiscal and monetary policies being implemented and in spite of the impact of higher petroleum prices. The inflation rate for the same FY is expected to be as low as 5.5% coming down from 8.3% reached the year before. The Kip, although depreciating slightly against the Thai baht by 2.3% and appreciating by 7.8% against US dollar, has remained globally quite stable as a result of sound 8

11 monetary management, greater confidence from its citizens and foreign operators in the national currency, and increased bank deposits. Money supply for the first half of the year has increased by 42.7% compared to the previous year (March 2006). The major source of liquidity growth included an increase of 77.6% in foreign currency deposits. The Balance of Payments has slightly improved in , due to increased exports and FDI, allowing the current account deficit to decrease to 6% of GDP and official reserves to be at the level of the equivalent of 3 months of imports. Public Revenues and Expenditures The FY 2006/07 is the second year of the 6 th 5- year Plan ( ). The directives of budget plan for FY 2006/07 have been to diligently strive towards promoting robust economic growth with equity, reducing poverty, building up the strengths gradually, integrating the budget plan with the 6 th Plan, and continuing to maintain the macroeconomic stability. During the FY, the public financial management framework has improved and several measures were undertaken in this regard including the adoption by the National Assembly of the new Budget Law, Audit Law, Law on Value-Added Tax and Enterprise Accounting Law. Preliminary data suggested that the domestic revenue collection in FY will exceed the target by 9 to 10 percent, and reach about 5,306 billion Kip (or 13.8 percent of GDP). The tax revenue is the main budget resource and is expected to exceed the target by 12 percent while the non-tax revenue has just met the target. The revenue from grants also performed well in comparison to the last fiscal year and will amount to 1,083 billion kip. The success in the revenue collection resulted from the efforts of the Government through active implementation of the policy reforms and measures laid out in the budget implementation plan. The Government has actively disseminated and provided training and advice on implementation of the Amended Tax and Customs Laws. Moreover, the Government has intensified the administration of tax collection from all business units by using the vouchers/receipts system as defined by the Laws. The higher price of gold and copper also helped the receipts from natural resource tax to surpass the target. Budget Revenue Structure: 9

12 Budget Revenue Structure FY (Estimation) Composition Amounts in billion Kip Total Revenue 6,389 Of which: -Tax 2,555 -Customs Duties 1,497 -State Property receipts 1,041 -Others, including timber 166 (Total Domestic Revenues) (5.306) -Grants 1,083 % of GDP 16.5 % 6.6 % 3.9 % 2.7 % 0.4 % (13.8%) 2.8 % The Government has managed to restrict total expenditures (including current and locally-financed investments) in line with targets, minimizing the need for domestic financing. However, this prudent budgetary policy has not affected social sectors which continue to receive increased budget allocations in accordance with the government s policy to improve its public service delivery especially in Education, Health, Agriculture, Rural Development and Transport 1. For FY , public expenditures are estimated at the level of 7,562 billion Kip (19.7% of GDP). The total budget deficit is estimated at about 3.4% of GDP 2. This is the second consecutive year that the government contains the deficit at target level. In addition the country s debt position was improved. Public Expenditure Structure FY (Estimation)) Composition Amounts in billion Kip % of total expenditure Total Expenditure -Salaries, allowances, operations, and transfers -Debt payment -Public Investment (PI) of which: ODA; Domestic investment 7,562 3, ,708 3,191 (86% of total PI) % 42 % 9 % 49 % 42 % 7 % 1 Public spending in these sectors is indicated in relevant sections of this document. 2 Source: MoF, preliminary estimations. 10

13 With the economy growing at a rate of 7 to 8%, the expected broadening of the base of growth, the enforcement of customs duties and tax collection, and the ongoing efforts in ensuring greater central accountability over the provincial finances, public revenues are expected to increase significantly over the coming years, making it possible to further strengthen the fiscal position.. Economic Growth The stable macroeconomic situation and favorable investment environment have significantly boosted economic growth. The GDP increased by 7.6 % in real terms for the fiscal Year and this allowed, in the same manner, the GDP per capita 3 to increase to a level of 6.58 million Kip (approximately 678 US$). Economic growth was boosted by the industrial sector (mainly mining, garments and construction) which reflected its expected dynamism and to a lesser degree by services (mainly tourism). Industry and Services achieved annual growth of 15.2% and 7% respectively. This compared to 2.4 % for Agriculture, Forestry and Fishery. Distribution of GDP by sector Sector: % increase % of GDP -Industry -Services -Agriculture 15.2 % 7 % 2.4 % 33.3 % 26 % 40.7 % The slow development of the agriculture sector remains a matter of concern as agriculture represents the main source of income for more than 75% of the labor force. It is indeed worrying that Lao PDR which possesses rich natural resources and has established farming traditions cannot provide enough food for all its population. These are anomalies that the government needs to address. Greater efforts are therefore needed to improve the living conditions of the rural population and reduce inequalities. Increasing food production and outputs of industrial and commercial crops and forestry production remain among the major priorities for rural development as this is essential for poverty reduction. 3 At current price. 11

14 As such, this emphasizes the pressing need to build rural infrastructure, improve land entitlement, intensify irrigation, promote microcredit, facilitate trade and access to the market, and integrate remote areas into the mainstream of the economy. Exports Reflecting the dynamism shown by the economy in general terms, export growth has been better than expected. Exports could reach 653 million US$ in FY The international and regional market, bilateral trade agreements and favorable trade terms granted by bilateral partners have helped in opening important opportunities for the Lao products. In addition, simplified and more transparent bureaucracy, fiscal incentives and improved infrastructure have similarly represented favorable conditions for exportoriented business. Nevertheless, the export sector remains fragile as it is still depending on mineral (60%) and garment products, raising the pressure on the country s natural resources and the environment. In addition, the increasing cost of imports of investment-related machinery and raw materials are contributing to the deepening of the external trade deficit. These facts demonstrate the structural weaknesses of the economy and the narrow base of production, thus emphasizing the need to promote appropriate investments, diversify the sources of growth, improve trade facilitation and boost economic activities throughout the country. Investment The robust economic growth would not have been possible without significant public and private investments. Public and private investments during the FY amounted to a total of 1,482 million US$ or 37.5% of GDP 4. While public investments were oriented to create and improve physical and social infrastructure mostly in Transport, Agriculture, Rural Development, Health and Education; private investments were mobilized in minerals exploitation and processing, hydro-power, handicraft, agricultural production, tourism and trade. Even though private investment has achieved a significant increase over the past three years, several constraints are still hindering private sector development. These constraints are related, in particular, to the lack of good road and power infrastructure at the provincial level, insufficient legal and regulatory framework, trade limitations, problems 4 Reflecting sudden increase of FDI that is explained by new FDI large projects. Source: CPI 12

15 in land tenure, and the weak capacity of local entrepreneurs. There is, therefore, a need to pursue the implementation of reforms and measures aimed at creating an enabling environment for the private sector to strongly contribute to growth and poverty reduction. Within the Lao Business Forum, the GoL and private sector entrepreneurs pursue regular consultations (the latest was on 5 November 2007) on how to improve the business climate. Several measures and actions undertaken by the government in this respect are inspired by the deliberations within this forum. Employment Promoting job creation remains one of the top priorities of the GoL development strategy. Over recent years, the economy has generated an annual average of 100,000 new jobs 5. The NSEDP projects the creation of 130,000 new jobs per year. Albeit scarce data in this field, it could be cautiously considered that most of jobs created in were in the agriculture, forestry and fishery sectors, followed by services, and industry and construction. By the end of 2006, according to preliminary estimation, the economy had employed a total of 2,835,000 workers, of which: 2,125,000 in Agriculture, Forestry and Fishery; 453,000 in Services; and 255,000 in Industry and Construction. Although the bulk of the labor force is still employed within the agriculture sector, new job opportunities are significantly being generated by trade, tourism, and manufacturing activities, in line with the trends of private investment in these sectors. This indicates that the structure of the Lao PDR economy is slowly shifting towards the pattern seen in neighboring countries where the industry and services sectors are leading economic growth and job creation. Nevertheless, unemployment and underemployment are still high and additional efforts are essential to diversify economic activities, stimulate investments in small and medium enterprises, upgrade skills and promote vocational training to create a better environment for job creation. 1.3 Future direction with regard to the Macroeconomic Policy: Over the coming twelve months (FY ), the GoL will pursue the implementation of reforms, measures and actions to consolidate macroeconomic stability, foster investment and growth, and enhance efforts leading to poverty reduction. In this regard, the GoL is planning to reach the following main targets and outcomes: - 8% of GDP growth (with Agriculture growing at 3%, Industry at 15.8%, and Services at 7%) US$ of GDP per capita - Total Budget Revenue 7,069 billion Kip of which domestic revenue 6,030 billion Kip (13.9% of GDP) - Total Budget Expenditure 8,884 billion Kip (20.5% of GDP) 5 Source: CPI/DGP 13

16 - Budget Deficit at a level of 4.2% of GDP to be financed by ODA (2,754 billion Kip mainly in the form of grants) and domestic borrowing (50 billion Kip) - Inflation rate at less than 6% - Increased Exports and reduced Trade Balance Deficit to 5% of GDP - Poverty reduced by another 3% - Investment to reach 32% of GDP, of which Public Investment of about 8% of GDP and Private Investment of about 24% of GDP The achievement of these targets and outcomes will require a set of supporting instruments and actions, of which the following are key elements: - Pursuing and accelerating the implementation of public financial management measures, within the implementation of the Public Expenditure Management Strengthening Programme (PEMSP). This will include enforcement of the amended Tax and Customs Law and related regulations; strengthening tax and customs administration; harmonizing the Budget preparation and execution with the NSEDP and Public Investment Programe s priorities and requirements; strengthening the management of State assets; pursuing efforts towards the centralization of the national treasury administration; and preparing the ground to move towards a medium term fiscal framework integrating both revenue and expenditure aspects. In addition, the GoL intends to implement a rolling programme of Public Expenditure Reviews, Public Expenditure Tracking Surveys and analytical work geared to monitoring progress in the implementation of the PEMSP and assessing improvements in fiscal management and impact of public spending in key sectors. - Continuing on-going efforts within the improvement of the banking and financial sectors to support private sector development and extending rural outreach; - Strengthening policy actions, rules and procedures to improve the business environment - Continuing implementation of Governance improvement actions including the legal framework and public administration reform - Direct additional budget resources and ODA to Public Investment projects and programmes (PI): domestic funds of 688 billion Kip (approximately 69 million US$) will be allocated to PI during FY ; and public investment resources from ODA are expected to be at the level of 2,754 billion Kip (approximately 275 million US$) including ongoing projects, giving a total of projected PI for FY of about 344 million US$. 1.4 Cross-cutting Issues: Current situation and future actions Poverty reduction In spite of the challenges and constraints, important progress was achieved in poverty reduction illustrating the Government s continuing commitment to significantly improve the livelihood of the poor and reduce inequalities between different categories of Lao s multi-ethnic population. 14

17 The percentage of the population living below the poverty line declined from 46% to 33% during the decade , and is estimated to be at 30.7% in 2005, and most probably the same trends have continued in There is thus a high likelihood that the Lao PDR will achieve the 24% target projected for 2015 within the MDGs 6. Significant actions and measures are being undertaken within the implementation of the poverty reduction strategy. Targeted interventions are being implemented in the 47 poorest and 25 poor districts. The Poverty Reduction Fund activities have expanded to cover 21 districts, 252 Kumbans and 1913 villages. Increased financial resources from national budget and international assistance are being channeled towards the implementation of poverty focused programmes such as the National Unexploded Ordnance Programme (UXO Lao), the National Strategy on HIV/AIDS/STI, the Drug Control programme, Gender Equality programmes, and Rural Development programmes including rehabilitation and construction of rural infrastructure, land-forest allocation, promotion of village development funds and extension of microcredit, food security, protection against natural calamities and the provision of basic social services. At the institutional level, a National Committee for Rural Development and Poverty Reduction was established under the Prime Minister Office to ensure coordination between central and local authorities and improve effectiveness of efforts deployed in the field of poverty reduction. In addition, these initiatives are being supported and complemented by specific actions benefiting directly or indirectly the poor in the four priority sectors: Agriculture and Forestry, Education, Health and Infrastructure. The Government recognizes, however, that poverty reduction has benefited the urban centers more than rural areas, suggesting that efforts are needed here also for a better balanced growth, significant reduction of inequalities between regions and different categories of the population, and expanded coverage of public services especially in Health and Education. Governance Governance reform initiatives are taking several strategic steps to strengthen the machinery of administration, including better public service management, implementing rule of law, and enhancing mechanisms for people s participation, in addition to public financial management practices described earlier. As the country moves towards greater regional and global integration, the legal and judicial framework is being harmonized with international standards, especially in areas of commerce, bankruptcy and labor. Laws on Government, People s Courts, Public Prosecutor and Judgment Enforcement are being reviewed and amended. The compilation and regular updating and dissemination of legislation through the Legal 6 Source: CPI/DGP and preliminary findings of the 2008 MDG report. 15

18 Research Centre will be continued. Various measures included in the master plan for the legal sector, shared with stakeholders including DPs, will be thoroughly implemented. A national programme has been launched to improve delivery of regular public services, and guide initiatives to further improve service delivery. The programme will strengthen the oversight mechanism of the government, including multi-sectoral coordination, at the highest level. Alongside, it will provide a platform for designing and funding small public infrastructure, through district development funds, to improve service delivery. The government is addressing the challenges at the citizen interface through mechanisms such as One-Door-Service-Centres and simplification of procedures. By mainstreaming lessons from pilot projects, the government has been able to scale up the implementation of reforms and best practices. Sound financial management through use of the National Accounting System, and improved clarity at work through preparation of job descriptions, have contributed to administrative effectiveness. Other initiatives which are being piloted include development of municipalities and Kumban Pattana. The effectiveness of the administration also depends heavily on the quality and effectiveness of its human resources. Important steps to establish a National Civil Service Training and Development Framework and National Training Curriculum have been completed, which draw lessons from an in-depth review of capacity building activities within all segments of the government. The national training framework is meant to harmonize long term capacity building in government, while facilitating adaptation to suit the specific requirements of sectors. While Development Partners strive to integrate capacity building support into sectoral interventions, the government emphasizes the need for a larger and harmonized initiative to substantially improve capacities across all key areas and levels in government. Recognizing the importance of all sectors in the balanced development of the country, governance reforms are helping to establish opportunities for the private sector and civil society to contribute to poverty reduction. Important legal provisions are being designed to enable these sectors to operate effectively, and partner the government in various initiatives for poverty reduction, in remote areas and for communities with special needs like disabled people. The capacity challenges are most acutely felt in furthering local responses to opportunities and constraints emerging from the new paradigm of an open market economy, globalized markets, trade liberalization, and competitiveness at all levels. Informed decision making and quick responses are an imperative. The lack of capacity of government institutions to generate and utilize quality statistical data and other information that are essential for sound planning, programming and budgeting needs to be addressed. Capacity substitution through technical assistance has been a short term response to these challenges, and to offer a pragmatic assistance to formulate strategies and plans. It is evident that such assistance needs to be augmented with systematic steps to build greater awareness and conceptual clarity among senior officials, to take on these responsibilities. 16

19 National Millennium Development Goals The Government of the Lao PDR, with support from the UN Country Team is in the process of developing its second progress report for the Millennium Development Goals (MDGs). The first progress report was released in January 2004, and the second Progress Report is due to be released in the first quarter of Reporting on the MDGs is timely, given that 2007 is the midpoint between the adoption of the MDGs and the 2015 target date. In addition, the government is also implementing its Sixth National Socio-Economic Development Plan (NSEDP) and the success in implementing the Sixth Plan will determine to what extent the Lao PDR is able to meet its MDG targets. New data on almost all indicators is now available, and the second MDG Report 2008 will help to take stock, review progress and identify areas where additional effort is required if Lao PDR is to meet the MDG targets by The analysis from the MDG Report will also feed into the government s upcoming mid-term review of the NSEDP, and will guide the provincial and district budget planning exercises for the coming fiscal year. The main data sources that will be used in the preparation of the MDG Report for 2008 include: Population Census, 2005 and 1995; Lao Expenditure Consumption Survey (LECS), ; ; and ; Multiple Indicator Cluster Survey (MICS), 2006; 2002; and 1997; Lao Reproductive Health Survey (LRHS), 2005 and 2000; Establishment Census 2007; and Routine information collected by line ministries. This MDG Report II aims to take a closer look at the data, review a large number of data sources, reconcile inconsistencies and fill data gaps wherever possible. The MDG Report 2008 will also have a number of new features, including: (i) reporting on Goal 8 for the first time, (ii) the inclusion of new indicators and targets, and (iii) revision of baselines and targets of some of the existing indicators. Main preliminary findings of the 2008 MDGs report, at this stage of the preparatory work, are as follows: Goal one: Eradicate Extreme Poverty and Hunger Poverty declined from 46% to 33% during the decade , and is estimated to be at 30.7% in 2005, placing the country on track to attain the MDG target of halving poverty by Goal two: Achieve Universal Primary Education 17

20 Primary completion rate has increased slightly from 1991 (48%) to 2004 (60%). Progress in retention of students at the primary level is always slow, however, at the current rate the MDG target of 90% by 2015 looks beyond reach. Goal three: Promote Gender Equity and Empower Women In education, fewer girls than boys are enrolled at all levels with large disparities in rural areas and among vulnerable groups. Overall, the gender gap is closing but at a slow pace. Therefore, this MDG requires increased awareness, targeted policies and resources. Goal four: Reduce Child Mortality At the national level, child mortality indicators are improving satisfactorily. The under-5 mortality rate declined from 197 in 1990 to 98 in 2005 (target of 66 for 2015), and the infant mortality rate from 119 in 1990 to 70 in 2005 (target 40 for 2015). At this rate, the 2015 target is within reach. Goal five: Improve Maternal Health Data for this indicator are still under analysis, however, for each woman that dies, it is estimated that 15 to 20 women suffer from maternal morbidity. This target seems to be out of reach. Goal six: Combat HIV/AIDS, Malaria, TB and other diseases The death rate associated with malaria (per 100,000 of the population) decreased from 9 in 1990 to 0.4 in 2006 placing this indicator in line to meet its 2015 target of 0.2 (per 100,000). Considerable progress has been made for the tuberculosis indicators, and two related indicators have already met the 2015 target. Goal seven: Ensure Environmental Stability The proportion of people with access to safe drinking water and basic sanitation increased significantly. Goal eight: Develop a Global Partnership for Development This target relates to ODA, market access, debt sustainability, access to essential drugs and to new technology. The GoL is in the process of localizing indicators to the Lao PDR context for this goal. 18

21 1.5 Sectoral Policies implementation This section focuses only on Education, Health, Agriculture/Forestry, and Transport which are among the main priority sectors with regard to budget and ODA resources allocation, and given the pressing needs of these domains and the impact they have on accelerating poverty reduction and achieving the Millennium Development Goals. The GoL has achieved good progress in social sectors development, particularly in Education and Health. This progress was reached not only in quantitative terms, but also in terms of quality of the services rendered to the population. Education Efforts are ongoing within the strategy Education For All and other relevant strategic and policy papers to expand basic education infrastructure especially in remote areas, improve the quality of education, ensure equitable access to education services and strengthen the sector management. The coordination and management of the Education sector is realizing good results. Within the Sector Working Group, the MoE is pursuing consultations with national stakeholders and Development Partners to ensure consensus on policies and programmes, secure resources, coordinate operations and activities, and improve resource effectiveness. The Education sector is receiving increased resources from the National Budget and ODA. Public spending on Education is reaching approximately 12% of total public expenditure 7 and approximately 19% of total ODA disbursements 8 (FY ). As a percentage of GDP, spending on Education represents less than 3%. Although it is steadily improving, public spending in this sector remains low when compared to countries in the region. Education indicators are still low although improving continuously. In 2006, the primary net enrollment rate was about 87%, lower secondary gross enrollment rate was 65% and upper secondary enrollment was 42.5%. Likewise, problems related to repetition, dropout, class size and unqualified primary school teachers are still sharp, especially in disadvantaged areas. The constraints inherent to the population dispersion and the limited physical access in many areas are also restraining the government efforts in developing the education sector. Therefore, additional efforts and resources remain necessary to pursue the implementation of the Government Education Strategy and, in particular, further promoting investments in basic education, providing support to vocational and higher 7 Source: Public Expenditure Review On the basis of Public Expenditure Review and reconciled figures from different sources. 19

22 education, speed up education system reform to ensure standards of quality education, improve the deployment of qualified teachers, and provide adequate equipments and incentives. In addition, the MoE will pay greater attention to the functioning of the Sector Working Group for better aid effectiveness within the Vientiane Declaration. Health The implementation of the health care strategy is underway and realizing significant results. It is involving government, communities and international assistance. The large number of hospitals and health centers that exist in the country put Lao PDR among those countries in the region that have elevated ratio of hospitals and health centers per population served. Primary health care, both preventive and curative, is being expanded at the central, district and village levels with larger number of dispensaries and health centers. Particular attention is given to high risk groups, child immunization, transmittable diseases as well as safe water and sanitation. Treatment at the central and provincial hospitals is being upgraded. Alongside treatment facilities provided by the public sector, the private health network is expanding with larger number of private clinics in Vientiane and other cities. Most of the indicators regarding infant mortality, under five-year mortality, and life expectancy are improving significantly (see section related to MDGs). In terms of spending, increased budget allocation and donor-funded projects are directed to the health sector improvement. Public expenditure in Health represents 1.5% of GDP and 7% of total public expenditure 9 in With regard to donor coordination, the Sector Working Group on Health has contributed in a positive way to priority setting and better aligning external resources with the sector policies and programmes. Notwithstanding these achievements, health care services are still far from meeting the needs of the populations in quantitative and qualitative terms. Health problems are still severe in remote and poor areas and not all categories of the population can easily access health services. Over the coming year, the GoL will continue to expand the health facilities network, pay further attention to maternal and child health, vaccination, transmittable disease prevention, safe water and sanitation, and deploy health personnel in rural villages. Efforts will also be directed to the prevention of epidemic disease mainly avian flu, malaria and diarrhea. In addition, the MoH will focus on the following actions: Strengthening the ministry s leadership, coordination and capacity in the sector 9 On the basis of Public Expenditure Review and reconciled figures from different sources. 20

23 Aligning and harmonizing Development Partners operations Strengthening financial management and procurement systems within the sector Further improving the Sector Working Group with a particular focus on the implementation of the Vientiane Declaration and related Action Plan. With regard to Agriculture/Forestry, and Transport, the GoL is strongly involved in creating the necessary infrastructure in urban and rural areas to boost economic activities, encourage private enterprises, promote domestic and regional trade, and open opportunities for development throughout the country. Agriculture and Forestry Over the past few years, the GoL has introduced policy measures to shift agriculture sector from subsistence to commercial production aiming at ensuring enhanced supply of raw materials to processing industries, meeting the growing domestic requirements for agricultural products and expanding agricultural exports. Within the NSEDP annual plan , the following results were achieved in the four priority programmes: Food Production: in the FY , rice production reached 2.58 million tons, which is close to projected volume, of which rain fed rice was 2.08 million tons (cultivated area is 631,463 ha); upland rice 174,526 tons (104,585 ha involving 143,277 households); and irrigated paddy 329,126 tons (72,800 ha) representing an increase of 6% in comparison with last year. The number of irrigation schemes has continued to increase. Due to the increase of irrigation and the introduction of new crop varieties, rice yield increased from less than 3.06 million tons per ha in 2000 to 3.6 million tons in The total area used for other food crops was 180,900 ha in which the most common crops applied are maize and different kinds of vegetable. The total production of meat and fish was 198,700 tons of which 90,700 tons of meat and 108,000 tons of fish. 11. Commodity Production: targets set in the annual plan was to promote agriculture and forestry production linked to commodity processing for export, targeting a volume of 200 million US$. The total value of marketable commodities from crops, livestock, forest products and non-timber forest products, if exported, are estimated at about 228 million US$ of which 153 million from crops, 25 million from livestock, and 50 million from forest products and non-timber forest products 12. Stopping shifting cultivation, stabilizing livelihood and reducing poverty: this programme was implemented in 47 poorest districts. Mitigation measures 10 Source: MAF and CPI. 11 Ditto 12 Ditto 21

24 included land use planning and land allocation which was practiced in conjunction with the promotion of livelihood alternatives leading to permanent production systems, e.g. paddy production, industrial commodity, fruit trees, livestock production, integrated agriculture production, industrial forest trees, non-timber forest products, micro-credit for farmers, handicraft, etc. As inputs to the production process, resources from 13 donor-funded projects of billion Kip were mobilized. These projects were implemented in 80 districts of 17 provinces throughout the country covering 303 kumbans, 2,520 villages and 60,056 households. Sustainable Forest Management: A total of 310,601 ha of forest were proposed for production. Forest management inventories were conducted in three areas covering 34,154 ha. Land surveys for tree and industrial crop plantation were also completed in 65,395 ha of which 24,720 ha for rubber, 10,000 ha for cassava, 22,175 ha for other industrial trees, 7,500 ha for sugar cane and 1,000 for jatropha plantation. In addition, the MAF has disseminated the PM Decree No. 31 and other relevant regulations and participated in solving forest-related problems at local level, including cross-boundary logging and timber traffic, and conducted regular monitoring of forest issues. With regard to forest regeneration, 158,000 kg of seeds were collected; 72 million seedlings were produced; a land area of 91,700 ha were surveyed for tree plantation; 25,000 ha of land were cleared for tree plantation; 19,376 trees were planted; natural forest regeneration was initiated in 78,500 ha and a number of campaigns were conducted for the prevention of forest fire. Shortages and constraints: targeted production from irrigated rice was not fully achieved due to irrigation systems that need renovation; productivity in irrigation focused areas has not been able to reach targets due to insufficient supply of fertilizer and agro-chemicals and credit; occasional occurrence of forest fire and forest destruction practices; land zoning for agriculture production did not meet arising demands from investors; decentralization process has not reached expected results; and lack of coordination between the central and local level authorities.. Nevertheless, the MAF is improving the capacity of its staff, enhancing financial management and procurement, and - together with the Sector Working Group-, strengthening the coordination and improving the harmonization of donor activities. For the coming months and years, the MAF in collaboration with DPs will pursue the implementation of the sector development programmes, and in particular: Expanding food production and promoting food security to increase social benefits for farmers and rural population Accelerating the transformation of small subsistence production to large marketable production systems related to processing industry and domestic and foreign trade 22